The Lang Cat: Platform custody costs will not fall to 15 bps

Platform custody costs will not bottom out at 15 bps in the next five to 10 years, according to The Lang Cat.

The platforms, pensions and investment consultancy says in a report on the advised platform market that since 2011 custody costs have fallen by seven to eight basis points, or 18 per cent.

The Lang Cat says it disagrees with the commonly-held view that costs will bottom out at 0.15 per cent.

It says this would require a 57 per cent drop in costs from their current average of 0.35 per cent, based on a £200,000 portfolio.

The report says there are not large margins left for continued price cuts, and that if further savings are to be made they will come from asset management charges.

The Lang Cat predicts that costs will settle at around 0.30 per cent in five years’ time, and 0.25 per cent in 10 years’ time.

The report also says the advised market will follow the direct-to-consumer market and introduce price caps.

It says: “Price capping has issues that need careful consideration.

“It’s true that servicing a customer with £5m doesn’t cost 50 times as much as servicing one with £100,000.

“But how a platform arrives at the conclusion about how much revenue is enough is an interesting question. And a platform will always need to have a high proportion of customers below the cap level to allow for revenues to increase.”

The report shows that new business has been going to the market rate, suggesting advisers are choosing solutions based on factors other than price.

The Lang Cat market analysis manager Terry Huddart says: “There is a general view that custody costs have further to fall and will eventually level out at 0.15 per cent in the future, but we’re pretty convinced that won’t happen in the next five to 10 years and question whether it will ever be sustainable.

“Investors are typically now paying 18 per cent less than pre-RDR, but that fall has happened during a period where legislation and a competitive bloodbath combined to produce a price war that has since plateaued. A further 57 per cent drop therefore looks unlikely in the next decade.”

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21st February 20183:09 pm

Comments

There are 4 comments at the moment, we would love to hear your opinion too.

I completely disagree. Custody, reporting and rebalancing of portfolios is a commodity and as economics students know, commoditisation leads to significant pricing pressure as platform offerings become homogenised. Scale, efficiency and cost control are the key drivers of the successful investment platforms in the future, as has happened in the USA where the market is dominated by three large providers which charge NO basis points but modest transaction/activity fees. In ten years’ time I reckon we’ll look back and laugh that any thought that a platform could even charge 15 bps!

Thanks for taking an interest in the report. Even if you don’t agree with all of our findings, I hope you found it at least thought provoking.

The commoditisation theory is a fair point but I actually think there will continue to be tangible diversification across UK platform propositions. Due to the degree of diversity and number of financially robust platforms with good scale, it’s very hard to see that the UK will follow the US and Australia by consolidating into three or four platforms.

I don’t agree the conditions for platforms to charge well below 15 bps (regardless of mechanism) and continue to provide the necessary levels of service are going to be there (in the foreseeable future anyway).

I agree that a 57% cut in costs is unlikely but it isn’t necessary to get from 35bps to 15bps. If all business went to the lowest cost (as opposed to charge) platforms the average cost would be 20bps. Not everyone is going to do that but the situation is quite like the investment side – to go from 75-100bps to 10-15bps for UK equities doesn’t need a huge cost cutting exercise, just a switch from active to index. In the US the index trend accounts for 95% of net cash flow while platform custody is as good as free today.